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Adirondack Insurance Exchange - Exam Report

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					                     REPORT ON EXAMINATION


                             OF THE


                 ADIRONDACK INSURANCE EXCHANGE


                             AS OF


                        DECEMBER 31, 2008




DATE OF REPORT                                   JANUARY 29, 2010

EXAMINER                                         FE ROSALES, CFE
                                   TABLE OF CONTENTS


ITEM NO.                                                 PAGE NO.


   1.      Scope of examination                             2

   2.      Description of Exchange                          3

           A.   Management                                   3
           B.   Territory and plan of operation              5
           C.   Reinsurance                                  6
           D.   Holding company system                      8
           E.   Significant operating ratios                10
           F.   Accounts and records                        10

   3.      Financial statements                             12

           A. Balance sheet                                 12
           B. Underwriting and investment exhibit           14

   4.      Losses and loss adjustment expenses              15

   5.      Compliance with prior report on examination      15

   6.      Summary of comments and recommendations          16
                                 STATE OF NEW YORK
                               INSURANCE DEPARTMENT
                                  25 BEAVER STREET
                              NEW YORK, NEW YORK 10004

                                                                                January 29, 2010


Honorable James J. Wrynn
Superintendent of Insurance
Albany, New York 12257


Sir:

       Pursuant to the requirements of the New York Insurance Law, and in compliance with the
instructions contained in Appointment Number 30361 dated June 24, 2009, and attached hereto, I
have made an examination into the condition and affairs of Adirondack Insurance Exchange as of
December 31, 2008, and submit the following report thereon.

       Wherever the designation “the Exchange” appears herein without qualification, it should be
understood to indicate Adirondack Insurance Exchange.

       Wherever the term “Department” appears herein without qualification, it should be
understood to mean the New York Insurance Department.

       The examination was conducted at the Exchange’s attorney-in-fact’s office at One Beacon
Lane, Canton, MA 02021.
                                                  2

                              1.    SCOPE OF EXAMINATION

       The Department has performed a single-state examination of Adirondack Insurance
Exchange. This is the first financial examination of the Exchange after the report on organization,
which was conducted as of May 17, 2006. This examination covered the period from May 18, 2006
through December 31, 2008. Transactions occurring subsequent to this period were reviewed where
deemed appropriate by the examiner.

       This examination was conducted in accordance with the National Association of Insurance
Commissioners (“NAIC”) Financial Condition Examiners Handbook (“Handbook”), which requires
that we plan and perform the examination to evaluate the financial condition and identify prospective
risks of the Exchange by obtaining information about the Exchange including corporate governance,
identifying and assessing inherent risks within the Exchange and evaluating system controls and
procedures used to mitigate those risks. An examination also includes assessing the principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation, management’s compliance with Statutory Accounting Principles and annual statement
instructions when applicable to domestic state regulations.

       All accounts and activities of the Exchange were considered in accordance with the risk-
focused examination process.       The examiners also relied upon audit work performed by the
Exchange’s independent public accountants when appropriate.

       This examination report includes a summary of significant findings for the following items as
called for in the Handbook:

                                   Significant subsequent events
                                   Exchange history
                                   Corporate records
                                   Management and control
                                   Fidelity bonds and other insurance
                                   Pensions, stock ownership and insurance plans
                                   Territory and plan of operation
                                   Growth of Exchange
                                   Loss experience
                                   Reinsurance
                                   Accounts and records
                                   Statutory deposits
                                   Financial statements
                                   Summary of recommendations
                                                 3
       This report on examination is confined to financial statements and comments on those matters
that involve departures from laws, regulations or rules, or that are deemed to require explanation or
description.

                         2.     DESCRIPTION OF EXCHANGE

       Adirondack Insurance Exchange was incorporated under the laws of the State of New York
on May 25, 2006. It became licensed on May 25, 2006 and commenced business on the same date.
The Exchange was organized by White Mountains Insurance Group, Ltd., Bermuda (“White
Mountains”) with an initial surplus to policyholders of $70,700,000. The initial surplus was provided
by Homeland Insurance Company of New York, a subsidiary of White Mountains, pursuant to a loan
agreement conforming to Section 1307 of the New York Insurance Law, which provides that such
loan may only be repaid out of free and divisible surplus of such insurer with the approval of the
superintendent.

A.     Management

       Pursuant to the Exchange’s declaration of initial subscriber and by-laws, management of the
Exchange is vested in the advisory committee consisting of not less than nine members nor more than
twelve members. The advisory committee meets annually during each calendar year. At December
31, 2008, the advisory committee was comprised of the following nine members:


        Name and Residence                           Principal Business Affiliation

        J. Paul Amaden, Sr.                          President and Chief Executive Officer,
        East Hampton, NY                             Amaden Gay Agencies, Inc.

        Louis Atti                                   Vice President,
        Angola, NY                                   ENB Insurance Agency, Inc.

        David R. Bauer                               President,
        Albany, NY                                   Capital Bauer Insurance Agency Inc.

        Elizabeth M. Gardner                         Operations Manager,
        South Hampton, NY                            Maran Corporate Risk Associates, Inc.

        Thomas Scott McDaniel                        President and Chief Executive Officer,
        Williamsville, NY                            Adirondack AIF, LLC
                                                  4
        Name and Residence                            Principal Business Affiliation

        John Scherrer                                 President,
        Williamsville, NY                             The Northwoods Corporation,
                                                      Potter, Harris & Scherrer Agency, Inc.

        John Vincent Stype                            President,
        Aquebogue, NY                                 Neefus Stype Agency, Inc.

        Joseph Tedesco                                Vice President,
        Harrison, NY                                  DeRosa, Rockefeller, Sohigian, Werdal Agency

        Michael Kelly Zimmerman                       Vice President, Claims
        Williamsville, NY                             OneBeacon Insurance Company


       A review of the minutes of the advisory committee’s meetings held during the examination
period indicated that the two annual meetings were generally well attended and each advisory
committee member had an acceptable record of attendance.

       However, the review of the minutes of the advisory committee revealed that the investment
transactions for the years 2007 and 2008 were not formally voted upon and approved by the advisory
committee during its annual meeting. It is important to note that materials which include the
investment schedules (acquisitions & disposals report) were presented during the meeting; however,
the minutes did not reflect that such materials were approved.

       Therefore, it appears that the Exchange did not fully comply with the Section 1411(a) of New
York Insurance Law which states in part that:

      No domestic insurer shall make any loan or investment ... unless authorized or approved by
      its board of directors or a committee thereof responsible for supervising or making such
      investment or loan . . .

       It is therefore recommended that the advisory committee formally vote and approve the
Exchange’s investment transactions at every meeting and that the minutes indicate such approvals to
ensure full compliance with Section 1411(a) of New York Insurance Law.

       As of December 31, 2008, the principal officers of Adirondack AIF, LLC, the Attorney-in-
Fact for the Exchange, were as follows:
                                                 5



         Name                                   Title

         Thomas S. McDaniel                     President and Chief Executive Officer
         Dennis Robert Smith                    Secretary
         Todd Colin Mills                       Treasurer
         Alexander Constantine Archimedes       Vice President
         Bradford Whitman Rich                  Vice President and General Counsel




B.     Territory and Plan of Operation

       As of December 31, 2008, the Exchange was licensed to write business in New York only.

       As of the examination date, the Exchange was authorized to transact the kinds of insurance as
defined in the following numbered paragraphs of Section 1113(a) of the New York Insurance Law:

       Paragraph                                Line of Business

            4                                   Fire
            5                                   Miscellaneous property
            6                                   Water damage
            7                                   Burglary and theft
            8                                   Glass
           11                                   Animal
           12                                   Collision
           13                                   Personal injury liability
           14                                   Property damage liability
           17                                   Credit
           19                                   Motor vehicle and aircraft physical damage
           20                                   Marine and inland marine
           21                                   Marine protection and indemnity
           22                                   Residual value
           26                                   Gap


       Based on the lines of business for which the Exchange is licensed and pursuant to the
requirements of Articles 13 and 41 of the New York Insurance Law, the Exchange is required to
maintain a minimum surplus to policyholders in the amount of $9,900,000.
                                                    6
         The following schedule shows the direct premiums written by the Exchange both in total and
 in New York for the period under examination:


                                                              Premiums Written in New York State as a
Calendar Year New York State          Total Premiums               Percentage of Total Premium

      2006          $ 54,566,034       $ 54,566,034                            100.00%
      2007          $189,933,712       $189,933,712                            100.00%
      2008          $181,375,721       $181,388,084                             99.99%


         The Exchange’s primary focus is providing personal lines property and casualty insurance
 coverages including but not limited to: automobile, homeowners, personal umbrella and dwelling fire
 in New York. The Exchange sells these personal lines property and casualty insurance products
 through a network of independent agents targeting markets in the state of New York.

 C.      Reinsurance

         The Exchange did not assume reinsurance business for the period under examination.

         Ceded Reinsurance Program

         The Exchange has structured its ceded reinsurance program to limit its maximum exposure on
 any one risk as follows:

         Property

         The Exchange’s ceded reinsurance program for its property business is to limit its maximum
 exposure in any one risk to $1 million. The Exchange maintains an excess of loss coverage for
 standard losses which consists of one layer. Reinsurers’ single loss limit of liability is $5 million and
 the total cumulative policy limit is $20 million during any one contract year.

         The Exchange also maintains excess of loss coverage for property loss resulting from
 catastrophe event consisting of the following four layers.
                                                    7

        Type of Treaty                              Cession

        Property Catastrophe excess of loss – $290,000,000 excess of $10,000,000 per
        Four layers as follows:               occurrence

        1st Layer – 54% authorized                  $10,000,000 excess of $10,000,000
        2nd Layer – 39% authorized                  $30,000,000 excess of $20,000,000
        3rd Layer – 58% authorized                  $80,000,000 excess of $50,000,000
        4th Layer – 56% authorized                  $170,000,000 excess of $130,000,000


       Casualty

       The Exchange has structured its ceded reinsurance program for its casualty lines of business
to limit its maximum exposure in any one risk to $1 million. The Exchange maintains an excess of
loss coverage for standard losses which consists of one layer. Reinsurers’ single loss limit of liability
is $5 million and the total cumulative policy limit is $15 million.

       Personal Line Automobile Quota Share

       The Exchange also maintains an 8% quota share program for its personal lines automobile
business with the following maximum limits:

              Automobile bodily injury liability:      $500,000 each person, $1 million each
               occurrence

              Automobile property damage liability: $500,000 each occurrence

              Automobile bodily injury and property damage liability (combined single limit):
               $1 million each occurrence

              Automobile medical payments: $50,000 each person

              Automobile property damage: $500,000 each vehicle

              Personal injury protection: $100,000 each person

       However, in the event that the limits outlined above are exceeded, the reinsurer’s liability will
not exceed its quota share portion of $6,250,000 for all coverages, all policies, any one occurrence.

       During the period covered by this examination, majority of the Exchange’s ceded reinsurance
treaties were with authorized reinsurers.
                                                  8
       It is the Exchange's policy to obtain the appropriate collateral for its cessions to unauthorized
reinsurers. The examiner did not review these letters of credit for compliance with Department
Regulation No. 133 since the amounts held under these letters of credit were not material.

       All significant ceded reinsurance agreements in effect as of the examination date were
reviewed and found to contain the required clauses, including an insolvency clause meeting the
requirements of Section 1308 of the New York Insurance Law.

       Examination review of the Schedule F data reported by the Exchange in its filed annual
statement was found to accurately reflect its reinsurance transactions. Additionally, management has
represented that all material ceded reinsurance agreements transfer both underwriting and timing risk
as set forth in NAIC Accounting and Procedures Manual, Statements of Statutory Accounting
Principles (“SSAP”) No. 62. Representations were supported by appropriate risk transfer analyses
and an attestation from the Exchange's chief executive officer pursuant to the NAIC Annual
Statement Instructions. Additionally, examination review indicated that the Exchange was not a
party to any finite reinsurance agreements. All ceded reinsurance agreements were accounted for
utilizing reinsurance accounting as set forth in SSAP No. 62.

D.     Holding Company System

       The Exchange is controlled by Adirondack AIF, LLC (“AAIF”), its Attorney-in-Fact. AAIF
is a wholly-owned subsidiary of OneBeacon Insurance Group, LLC, which is ultimately controlled by
White Mountains Insurance Group, Ltd. of Bermuda.

       A review of the holding company registration statements filed with this Department indicated
that such filings were complete and were filed in a timely manner pursuant to Article 15 of the New
York Insurance Law and Department Regulation 52.

       The following is an abridged chart of the holding company system at December 31, 2008:
                                                   9


                                               White Mountains Insurance Group, Ltd.
                                                           (Bermuda)


                                                  OneBeacon Insurance Group, LLC
                                                           (Delaware)


                                                          Adirondack AIF, LLC
                                                              (New York)


           Adirondack Insurance Exchange
                    (New York)


       At December 31, 2008, the Exchange was party to the following agreements with other
members of its holding company system:

   1. Insurance Management Service Agreement with Adirondack AIF, LLC.

       The Exchange was a party to an insurance management agreement with Adirondack AIF,
LLC pursuant to which, AAIF agreed to provide all necessary services for the operation of the
Exchange including the right to perform solicitation, underwriting, classification of risk, rating of and
premium determination for insurance contracts, adjusting of claims, collection of monies due to the
Exchange; issuing, modifying and terminating insurance contracts, and the authority to determine
appropriate premiums rates. The management fee is 14% of gross written premiums. It is noted that
this agreement was non-objected to by the Department.

   2. Investment Management Agreement with White Mountains Advisors, LLC

       The Exchange was also a party to an investment management agreement with White
Mountains Advisors, LLC ("WMA") pursuant to which, WMA provides investment research and
advice, including the execution of orders for the purchase and sale of securities. The agreement
states that WMA will act as a discretionary advisor with respect to the assets of the Exchange and
supervise the investments as described in the investment guidelines. WMA agrees to provide the
Exchange with reports containing the status of the investment account at least monthly, and will
                                                    10
provide written advisory report letters to the Exchange on a quarterly basis. It is noted that this
agreement was non-objected by the Department.

E.      Significant Operating Ratios

        The following ratios have been computed as of December 31, 2008, based upon the results of
this examination:

      Net premiums written to surplus as regards policyholders                                   239%

      Liabilities to liquid assets (cash and invested assets less investments in affiliates)      75%

      Premiums in course of collection to surplus as regards policyholders                        23%


        All of the above ratios fall within the benchmark ranges set forth in the Insurance Regulatory
Information System of the National Association of Insurance Commissioners.

        The underwriting ratios presented below are on an earned/incurred basis and encompass the
two-year and seven-month period covered by this examination:

                                                                      Amounts                  Ratios

      Losses and loss adjustment expenses incurred                 $182,683,400                60.87%
      Other underwriting expenses incurred                          140,228,751                46.73
      Net underwriting loss                                         (22,804,111)               (7.60)

      Premiums earned                                              $300,108,040                100.00%


F.      Accounts and Records

        A review of the Exchange’s accounts, records and annual statement reporting revealed the
following:

 1.     Annual Statement Preparation

        During this examination, the following errors in reporting certain items in the filed 2008
Annual Statement have been identified:

     i. In Schedule E – Part 1 – Cash, the Exchange incorrectly identified the bank holding its cash
        deposit of $6,144,098 as Bank of America. The correct bank should have been Bank of New
        York Mellon.
                                                      11
       It is recommended that the Exchange exhibit greater care in the preparation of its filed annual
statement.

   2. Uncollected Premiums Over 90 days Past Due

       A review of the filed annual statements as of December 31, 2006, 2007 and 2008 revealed
that the Exchange reported “zero” amount under non-admitted assets – (over 90 days past due for the
uncollected premiums and agents’ balances in the course of collection - annual statement line 13.1).
However, based upon the review of the information provided by the Exchange for uncollected
premiums and agents’ balance in course of collection, it was noted that uncollected premiums over 90
days past due amounted to $174,233.

       Section 1301(a)(6) of the New York Insurance Law states in part:

             In determining the financial condition of a domestic insurer … there may be
             allowed as an admitted assets of such insurer … Premiums in course of collection
             … not more than ninety days past due …


       Based on the above-noted information, the Exchange did not comply with the above-
referenced section of the law because it included uncollected premiums over 90 days past due as
admitted assets in its 2008 filed annual statement.

       It is recommended that the Exchange comply with Section 1301(a)(6) and going forward
report all uncollected premiums over ninety days past due as non-admitted assets in future annual
statement filed with the Department.
                                                        12




                                  3.      FINANCIAL STATEMENTS

     A         Balance Sheet

               The following shows the assets, liabilities and surplus as regards policyholders as of
     December 31, 2008 as determined by this examination and as reported by the Exchange:



Assets                                                                       Assets Not     Net Admitted
                                                                 Assets      Admitted          Assets

Bonds                                                         $160,012,569    $      0      $160,012,569

Cash, cash equivalents and short-term investments               32,969,774           0         32,969,774
Investment income due and accrued                                1,562,903           0          1,562,903
Uncollected premiums and agents' balances in the course
  of collection                                                 15,349,606           0         15,349,606
Deferred premiums, agents' balances and installments booked
  but deferred and not yet due                                  22,495,605          0          22,495,605
Amounts recoverable from reinsurers                                944,148          0             944,148
Net deferred tax asset                                           1,504,309          0           1,504,309
Sundry balances                                                  1,645,533    107,547           1,537,986

Total assets                                                  $236,484,447   $107,547       $236,376,900
                                                              13




Liabilities, Surplus and Other Funds                                                                     Surplus
                                                                                                         Increase
Liabilities                                                              Examination     Exchange       (Decrease)

Losses and Loss adjustment expenses                                     $ 66,038,199    $ 64,102,199    $(1,936,000)
Commissions payable, contingent commissions and other similar
   charges                                                                 9,061,889       9,061,889              0
Other expenses (excluding taxes, licenses and fees)                        2,107,309       2,107,309              0
Taxes, licenses and fees (excluding federal and foreign income taxes)     (1,112,395)     (1,112,395)             0
Unearned premiums                                                         80,154,082      80,154,082              0
Advance premium                                                            1,908,277       1,908,277              0
Ceded reinsurance premiums payable (net of ceding commissions)             1,228,447       1,228,447              0
Amounts withheld or retained by company for account of others                    549             549              0
Drafts outstanding                                                         3,139,286       3,139,286              0
Payable to parent, subsidiaries and affiliates                             3,164,317       3,164,317              0
Aggregate write-ins for liabilities                                        4,853,658       4,853,658              0
Total liabilities                                                       $170,543,618    $168,607,618    $(1,936,000)

Surplus and Other Funds
Surplus notes                                                           $ 70,700,000    $ 70,700,000    $          0
Unassigned funds (surplus)                                                (4,866,718)     (2,930,718)     (1,936,000)
Surplus as regards policyholders                                        $ 65,833,282    $ 67,769,282    $ (1,936,000)

Total liabilities, surplus and other funds                              $236,376,900    $236,376,900




   NOTE: The Internal Revenue Service has never audited of the Exchange’s Federal Income Tax
   returns.
                                                          14



B.      Underwriting and Investment Exhibit

        Surplus as regards policyholders decreased $4,866,718 during the two-year and seven-month
period examination period May 18, 2006 through December 31, 2008, detailed as follows:


 Underwriting Income

 Premiums earned                                                                         $300,108,040

 Deductions:
   Losses incurred                                                    $ 53,649,011
   Loss adjustment expenses incurred                                    29,034,389
   Other underwriting expenses incurred                               140,228,751

 Total underwriting deductions                                                            322,912,151

 Net underwriting gain or (loss)                                                         $ (22,804,111)


 Investment Income

 Net investment income earned                                          $16,603,107
 Net realized capital gain                                                (548,427)

 Net investment gain or (loss)                                                             16,054,680


 Other Income

 Net gain or (loss) from agents' or premium balances charged off       $      (217)
 Finance and service charges not included in premiums                      186,323
 Aggregate write-ins for miscellaneous income                              405,249

 Total other income                                                                           591,355

 Net income before dividends to policyholders and before federal
    and foreign income taxes                                                              $ (6,158,076)

 Dividends to policyholders                                                                          0

 Net income after dividends to policyholders but before federal
   and foreign income taxes                                                               $ (6,158,076)

 Federal and foreign income taxes incurred                                                    (28,943)

 Net income                                                                               $ (6,129,133)
                                                  15


 Surplus as regards policyholders per report on
   examination as of May 17, 2006                                                           $70,700,000

                                                                 Gains in     Losses in
                                                                 Surplus       Surplus

 Net income                                                  $           0   $6,129,133
 Net unrealized capital gains or (losses)                                0       88,080
 Change in net deferred income tax                               1,458,042
 Change in nonadmitted assets                                            0      107,547

 Total gains and losses                                      $1,458,042      $6,324,760
 Net increase (decrease) in surplus                                                          (4,866,718)

 Surplus as regards policyholders per report on
   examination as of December 31, 2008                                                      $65,833,282


NOTE: This is the first examination of the Exchange.




                     4.        LOSSES AND LOSS ADJUSTMENT EXPENSES

        The examination liability for the captioned items of $66,038,199 is $1,936,000 more than the
$64,102,199 reported by the Exchange in its December 31, 2008, filed annual statement. The
examination analysis of the loss and loss adjustment expense reserves was conducted in accordance
with generally accepted actuarial principles and was based on statistical information contained in the
Exchange’s internal records and in its filed annual statements.

        It is noted that the Exchange has recognized approximately $970,000 of the estimated
deficiency in its 2009 annual statement.


            5.        COMPLIANCE WITH PRIOR REPORT ON EXAMINATION

        There is no prior report on examination as this is the first examination of the Exchange.
                                                   16



            6.      SUMMARY OF COMMENTS AND RECOMMENDATIONS


ITEM                                                                                         PAGE NO.

 A.              Management

                 It is recommended that the Advisory Committee formally vote and                4
                 approve the Exchange’s investment transactions at every meeting and
                 that the minutes indicate such approvals to ensure full compliance with
                 Section 1411(a) of New York Insurance Law.

 B.              Accounts and records

       i.        It is recommended that the Exchange exhibit greater care in the                11
                 preparation of its filed annual statement.

      ii.        It is recommended that the Exchange comply with Section 1301(a)(6)             11
                 and going forward report all uncollected premiums over ninety days
                 past due as non-admitted assets in future annual statement filed with the
                 Department.
                                                        Respectfully submitted,

                                                               /s/
                                                        Fe Rosales, CFE
                                                        Associate Insurance Examiner




STATE OF NEW YORK  )
                   )ss:
COUNTY OF NEW YORK )

FE ROSALES, being duly sworn, deposes and says that the foregoing report, subscribed by her,

is true to the best of her knowledge and belief.




                                                              /s/
                                                        Fe Rosales




Subscribed and sworn to before me

this            day of                        , 2010.

				
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